SIGNIFICANCE OF TRANSFER PRICING IN GERMANY

German legislation on transfer pricing ("TP") establishes the principle of arm's-length pricing for related-party transactions. Foreign owned subsidiaries are intensely audited by German officials with respect to TP. Additionally, domestic multinationals currently face enhanced inspection from the German tax authority due to an exemption system which provides increased incentives to shift profits abroad. Notably, there is no statute of limitations for TP adjustments in Germany.

The following questions have been addressed in this article:

What was the purpose of the October 5, 2006 circular issued by Germany’s Federal Ministry of Finance?What are Germany’s pricing methods pursuant to the arm’s-length principle?What are the TP documentation requirements under Section 90 of German Finance Act of 2003?What are the penalties for failure to submit TP documentation?Is there any statute of limitations for TP adjustments in Germany?